Canadian banks not immune from global crises, warns CCPA

Published on Tue, 2012-07-03 08:37

Ellen Russell (CCPA)

Canada is not immune to the banking problems we see abroad, cautions “No More Swimming Naked”, a report released by the Canadian Centre for Policy Alternatives (CCPA) written by Ellen Russell, that examines how banks work, why they are inherently prone to instability, and how banking crises spread—even to banks and banking systems that appear to be stable. Russell warns that current regulations did not eliminate problems with risk-taking and overconfident behavior among banks.

Like all banks worldwide, Canadian banks are structurally vulnerable to instability. The report examines how banks work, why they are inherently vulnerable to instability, and how banking crises spread—even to banks and banking systems that appear to be stable.

“Canadian bankers and politicians brag a lot about Canada’s banks,” says author and Wilfrid Laurier professor Ellen Russell. “It’s time for some modesty. How many international financial crises must we have before we acknowledge that our banks are not immune from the temptations and threats that compromise banks in Europe, the US and around the world?”

According to the report, overconfidence is part of the problem. Complacency tends to encourage risk-taking among banks, while it deters Canadians from asking tough questions about banking. Yet this overconfidence ignores the fact that banking problems are often not apparent until systemic instability is growing.

The report cautions that current regulations have not eliminated these problems. Regulations are always imperfect, and their unintended consequences often set the stage for future financial turmoil.

“Even the best regulatory structure is vulnerable to excessive risk-taking by banks,” says Russell. “And we often do not know how serious the problem is until it is too late. As famed investor Warren Buffet has said, ‘You only find out who is swimming naked when the tide goes out.’”

Incentives to pursue risky activities have grown since the 2008 financial crisis, when it became obvious that very large banks are “too big to fail”. Since governments have no alternative but to support large banks when systemic stability is threatened, this additional security creates a perverse incentive for banks to increase their appetite for risk.

“We are putting out fires in banking systems around the world,” says Russell. ”Canadians need to discuss how to do banking differently so that we are not lurching from crisis to crisis.”